Penny Stock Short Selling

Posted by Editor in Articles

Trading in Penny Stocks doesn’t always have to be about price appreciation or future profits. Savvy investors know that, sometimes, “bad news can be great news” and that the best way to profit from bad news is with the trading technique known as the “Short Sale.”

The “theory” behind a short sale is quite simple:

· 1. You think that the price of a stock is about to go down.

· 2 You “sell” that stock, even though you technically don’t own it.

· 3. When the price falls, you then buy the stock that you originally sold for a price that is less that what you received in the first sale. The difference between what you sold the stock for and what you paid for the stock after its price fell is your gross profit.

In actuality, a short sale is a bit more complicated.

In Step #2, what you actually do is “borrow” the stock you sell from some other entity such as a brokerage house. In order to protect the brokerage house form a loss (and from government regulators), you will have to post a “margin” equal to some percentage of the value of the stock that you borrowed. As an example, if you sold a stock short that had a cash value of $1.000 and the margin requirement was 50%, you would have to post $1,000 × 50%, or $500 in margin. Additionally, you can expect to pay the usual brokerage commissions and fees on the transaction.

On the other end of the transaction, Step #3, when the price of your shorted stock falls, you buy the stock on the open market and “return” the borrowed shares to their original owner. The difference in what you received in the original short sale and what you paid for it in the second, or “covering” transaction, represents your profit Of course, you will again pay the brokerage and other such fees on this end of the transaction. And that, in a nutshell, is the short sale!